Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18690
Authors: 
Li, Jianpei
Wolfstetter, Elmar
Year of Publication: 
2004
Series/Report no.: 
CESifo Working Paper 1325
Abstract: 
We study a partnership that anticipates its possible dissolution. In our model, partnerships form in order to take advantage of complementary skills; although new opportunities may arise that make partners? skills useless. We characterize the optimal, incentive-compatible partnership contract that can be implemented by a simple call option, and then analyze the commonly used buy'sell provision. We show that this dissolution rule gives rise to inefficiency, either in the form of excessive dissolutions combined with underinvestment or efficient dissolutions combined with overinvestment. However, supplementing the buy'sell provision with the right to veto may restore efficiency.
JEL: 
L24
J12
D82
K12
C78
Document Type: 
Working Paper

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